One of the least visible, but most wasteful features of the federal government is something few Canadians ever hear about: internal cost recovery. It sounds harmless, even sensible. In practice, it is a bureaucratic shadow economy; departments billing each other for services, shuffling money back and forth across the federal ledger, and employing armies of staff to process transactions that produce no benefit for the public.

Prime Minister Mark Carney has spoken about making government smaller, smarter, and more accountable. Ending internal cost recovery would be one of the most powerful first steps in that direction.

What is internal cost recovery?
In theory, cost recovery ensures that when one department provides a service to another, the costs are borne by the recipient. For example, the Department of Justice bills departments for legal services. Shared Services Canada invoices other agencies for IT support. Administrative services, from payroll to translation to communications, are often cross-billed.

The intent was to make departments more aware of their costs, encouraging efficiency. In reality, it has created a closed-loop billing system that ties up thousands of public servants in paperwork and accounting exercises that add no value to taxpayers. Money flows from one government pocket to another, with staff tracking, reconciling, and auditing every movement.

Why it fails
The problem is that federal departments do not operate like businesses. There is no competition to drive down prices, no customer base to discipline quality, and no profit incentive to innovate. Cost recovery becomes an elaborate exercise in bookkeeping without the benefits of market discipline. Worse, it creates incentives for departments to prioritize revenue generation over service.

Take Justice Canada. Its “clients” are other departments. The more billable hours it can record, the more revenue it pulls in. Yet this revenue is not real, it is funded by taxpayers in the first place, laundered through another department’s budget. The system distorts priorities and consumes time that should be spent on delivering legal clarity, not chasing internal invoices.

Shared Services Canada provides another case. It was created to streamline IT across government, but its billing model has forced agencies into a vendor-client relationship with an entity that cannot be avoided. Agencies complain, invoices circulate, disputes arise, and the system groans under its own artificial complexity.

The hidden cost of staff time
Every invoice issued, processed, and reconciled requires public servants to handle it. Treasury Board has to monitor flows, departmental finance units have to manage transfers, and auditors have to verify them. Entire teams are employed in these transactions. None of this work would be necessary if departments were simply budgeted to deliver their services directly, as they should be.

Ending internal cost recovery could free thousands of hours of staff time each year. That time could be redirected to real work: drafting better policies, improving service delivery, or responding more quickly to citizens. In a public service already stretched for talent, reducing waste should be a top priority.

What should replace it?
The solution is straightforward. Departments should receive direct appropriations for the services they provide, based on realistic needs and demand forecasts. Justice should be funded to provide legal advice across government. Shared Services should be funded to deliver IT. Translation services should be budgeted to serve the entire public service.

Instead of charging their “clients,” these organizations should be judged on outcomes: timeliness, quality, and responsiveness. Treasury Board can hold them accountable through performance reviews, not through a maze of invoices.

The political case for reform
Ending cost recovery would not only save money; it would simplify government in a way Canadians could understand. Imagine explaining to the public that their tax dollars currently pay for one department to send an invoice to another, then pay again for that invoice to be processed, then pay once more for it to be reconciled, all for money that never leaves the federal accounts. Most Canadians would rightly ask: why not just stop?

This is low-hanging fruit in government reform. It does not involve painful layoffs or dramatic structural upheavals. It simply requires the courage to admit a failed system and replace it with something simpler and better.

A smarter Ottawa
Ending internal cost recovery will not solve every problem in Ottawa. But it is a symbol of the kind of reform Canadians expect: eliminating waste, cutting bureaucracy, and focusing staff time on serving the public. It sends a signal that government exists to deliver value to citizens, not to maintain pointless internal economies.

Prime Minister Carney has spoken about building a leaner and more effective government. Ending cost recovery is the perfect starting point. It demonstrates seriousness about reform, frees capacity across departments, and sets the tone for larger changes to follow.

Canadians are ready for a government that respects their time and their money. The shadow economy of cost recovery has run its course. It is time to end it.